I’m a self-employed consultant. What type of retirement savings account would be best for me?
The two best options for most self-employed workers are a Simplified Employee Pension (SEP) and a solo 401(k). You can make tax-deductible contributions to either plan, and the money grows tax-deferred until you withdraw it in retirement (you usually have to pay a 10% penalty for withdrawals before age 59½).
1) SEPs: You still have until April 18, 2016, to open a SEP for 2015. You can make 2016 contributions to a SEP account now, although the maximum limits are calculated based on your self-employment income, so you will need to have an idea of how much you will earn for the year.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you’re a sole proprietor, you can contribute up to 20% of your net self-employment income (business income minus half of your self-employment tax), with a maximum SEP contribution of $53,000 for 2015. The contribution limit is the same for 2016.
2) Solo 401(k)s: You needed to open a solo 401(k) account by December 31 for 2015, but you have until April 18, 2016, to make 2015 contributions. You can make 2016 contributions to a solo 401(k) account now, although, again, the maximum limits are calculated based on your self-employment income, so you will need to have an idea of how much you will earn for the year.
You may be able to contribute more to a solo 401(k) than to a SEP--up to $18,000 for 2015 or 2016 (or $24,000 if you’re 50 or older anytime during the year), plus up to 20% of your net self-employment income, with a total solo 401(k) contribution of $53,000 (or $59,000 if you’re age 50 or older). Your total contributions cannot exceed your self-employment income for the year.
Some solo 401(k)s give you the option to make Roth contributions, which are not tax-deductible now but can be withdrawn tax-free after age 59½ (see Get Tax-Free Retirement Income via a Roth Solo 401(k) for the rules, which are a bit tricky).
-
Getting Out of an RMD Penaltyretirement When your brokerage firm miscalculates your required minimum distributions, you have recourse.
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
-
It’s Not Too Late to Boost Retirement Savings for 2018
retirement Some retirement accounts will accept contributions for 2018 up until the April tax deadline.
-
How to Correct a Mistake on Your RMDs from IRAsretirement If you didn't take out the correct required minimum distribution because your brokerage firm made a mistake, the IRS may show some leniency.
-
Making the Most of a Health Savings Account Once You Turn Age 65
Making Your Money Last You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.
-
Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing
IRAs Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.
-
Make the Most of the New Military Retirement Plan
retirement The government is offering a new retirement option so that service members who leave the military before qualifying for a pension can still receive some benefits.
-
How Changes in Income Affect Medicare Premiums
Medicare Medicare beneficiaries can see their premiums go up if their income rises, although for some that increase will be only temporary.
